Document Number
04-200
Tax Type
Retail Sales and Use Tax
Description
Manufacturer of brake products for sale to wholesale distributors
Topic
Accounting Periods and Methods
Date Issued
11-03-2004


November 3, 2004


Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *****:

This will reply to your letter in which you seek the correction of retail sales and use tax assessments issued to ***** (the "Taxpayer"), for the periods January 2001 through December 2003 and June 2001 through December 2003. I apologize for the delay in responding to your letter.
FACTS

The Taxpayer is a manufacturer of brake products for sale to wholesale distributors. The Taxpayer operates two production facilities in Virginia and a separate research and development facility. The Taxpayer contests an audit assessment of use tax on equipment used in the research and development facility. In addition, the Taxpayer contests the assessment of use tax on a dust collection system used in one of the production facilities.
DETERMINATION

Research and Development Exemption

Virginia Code § 58.1-609.3 5 provides an exemption from the retail sales and use tax for:
    • Tangible personal property purchased for use or consumption directly and exclusively in basic research or research and development in the experimental or laboratory sense.

Title 23 of the Virginia Administrative Code (VAC) 10-210-3070 B interprets this exemption and states, "Research does not include testing or inspection of materials or products for quality control . . . ." The research and development exemption is limited to tangible personal property used directly and exclusively in an actual research process. Quality control is a manufacturing activity and not a research and development activity. Tangible personal property used in quality control activities is not used exclusively in research and development as required by this exemption.

Manufacturing Exemption

Virginia Code § 58.1-609.3 2 provides an exemption for machinery, tools, repair parts and supplies used directly in manufacturing and processing. The terms "manufacturing" and "processing" are defined in Va. Code § 58.1-602 to include "equipment and supplies used for production line testing and quality control." As the exemption is limited to production-line testing, it has been the Department's consistent policy that the manufacturing exemption does not extend to equipment used in pre­production or post-production quality control activities. This position is further supported by the Department's manufacturing regulation. Title 23 VAC 10-210-920 B 2 states, "Tangible personal property used in activities conducted away from the plant site . . . is deemed not to be used directly in manufacturing or processing." [Emphasis added.]

The property used by the Taxpayer for quality control testing is not used in the Taxpayer's manufacturing plant nor is it used for testing on the production line. For these reasons, the property does not qualify for the manufacturing exemption. This conclusion is consistent with quality control issues addressed by the Department in Public Documents 96-122 (6/7/96) and 98-125 (8/5/98). The assessment is correct with respect to purchases of property used for quality control purposes at the Taxpayer's research facility.

Dust Collection Equipment

The Taxpayer contests the assessment of use tax on the purchase of dust collection equipment used at one of its manufacturing facilities. The Taxpayer states that the intent at the time of purchase was to use the dust collection system to recycle dust created during manufacturing for reuse by the Taxpayer in the manufacturing process. At the time the audit was conducted, however, the Taxpayer had been unable to recycle the dust successfully. The Taxpayer believes the dust collection system qualifies for exemption based on the intent to use the system as part of its production process.

Public Document 98-125 (8/5/98) addresses a situation in which a manufacturer purchased machinery with the intent to use the machinery in its manufacturing process. The manufacturer was unable to use the machinery in the manufacturing process but did use it in a nonexempt activity. Although the manufacturer intended to use the machinery in an exempt activity, the machinery was first used in a taxable manner. Because the machinery was not used directly in a manufacturing process, the manufacturing exemption for the machinery was denied, regardless of the manufacturer's intent at the time of purchase.

The assessment of use tax on the Taxpayer's dust collection equipment is proper because, like the situation described above, the machinery is not used directly in manufacturing and the machinery is used in a taxable activity.

Conclusion

Based on the determination above, the audit assessments issued to the Taxpayer are correct. The Taxpayer has paid the assessments in full. I note that the Taxpayer has filed a ruling request with the Department. The ruling will be issued under separate cover.

The Code of Virginia sections, public documents and regulations cited are available online in the Tax Policy Library section of the Department's web site located at www.tax.state.va.us. If you have any questions concerning this determination, please contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.
                • Sincerely,


                    • Kenneth W. Thorson
                      Tax Commissioner


AR/50911S


Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46